Exit Consents in Debt Restructurings

Abstract

• The exit consent technique refers to an offer by a bond issuer to all the bondholders to exchange the existing bonds for new bonds or other types of securities, on the condition that the tendering bondholders must consent to a resolution which will amend the terms of the existing bonds so as to make the bonds less attractive.

• In Marblegate and Caesars, the US District Court for the Southern District of New York held that the relevant exit consent in each case violated Section 316(b) of the Trust Indenture Act of 1939 (US) on the basis that Section 316(b) prohibits not only impairment of a dissenting bondholder’s formal right to payment, but also ‘practical impairment’ of such right. This article argues that there is no sufficient justification for giving Section 316(b) a broader interpretation than its plain language suggests. Such an interpretation is inconsistent with the legislative history of Section 316(b) and how the term ‘impairment of a right’ is used in other contexts. In January 2017, in a 2:1 decision, the US Court of Appeals for the Second Circuit reversed the district court’s ruling in Marblegate, holding that Section 316(b) only prohibits non-consensual amendments to an indenture’s core payment terms.

• In Assenagon, the UK High Court held that the exit consent arrangement in that case was unlawful because it breached the abuse principle under English law. This article argues that the application of the abuse principle in exit consent cases should be considered in light of the factual context and the parties’ presumed intention. It is difficult to see how a consenting bondholder abuses its power when it is simply making a rational choice. Furthermore, it cannot possibly be the parties’ presumed intention that, when the issuer has made an exchange offer coupled with an exit consent, the consenting bondholder is required to prioritise the interests of the dissenting bondholders over its own interest.